Why Industrial Policy is not a solution for Africa’s problem

Since the early 2000s, sub-saharan African countries have experienced modest economic growth thanks to China’s growing appetite for commodities, macroeconomic stability, and strengthening political institutions. This growth has led many Western media outlets such as the Economist to get cheery about the continent’s economic prospects. In his recent post for the blog africascountry, Zambian PhD candidate in economics, Grieve Chelwa, argues for industrial policy–government-led promotion of industry– in order for the continent to truly rise. He sums up his argument thus:

Africa was more industrialized in the 1970s, at a time when the business climate was likely no different from what it is today. In my opinion, the Structural Adjustment Policies (SAPs) that were administered beginning in the early 1980s are largely responsible for halting the pace of industrialization on the continent. With SAPs, Africans were told by their betters to stop supporting industry because doing so was “wasteful”. Subsidies to industry were reduced. Protective trade barriers were removed. Planning for industry was done away with. All this advice was dispensed in spite of the fact that today’s developed countries industrialized behind a veil of considerable state support. For instance, the historian Sven Beckert points out that Britain’s cloth manufacturing industry, which was largely responsible for the Industrial Revolution, was shielded from competition from India for most of the 18thCentury. The Cambridge economist Ha-Joon Chang has called this phenomenon of rich countries forcing policies on poor countries that they themselves did not implement during their time of take-off as “kicking away the ladder”.   

The manufacturing sector has long been viewed as the main economic engine for industrialization. Unlike the primary sector, it provides well-paying jobs, skills transfers (positive spill-overs) and leads to economic development, as was the case in the West, Asian Tiger economies, and today’s China. At the heart of this economic transformation debate is the extent of government’s role. Some argue that good (inclusive) institutions create a climate that promotes innovation and leads to economic ascension. Others, including Chelwa, argue that an activist government plays an important role by fostering industrialization.

For every one winner, there are nine losers

He points to Britain’s protection for its cloth manufacturing industry in the 18th century as a reason for state support for African countries to industrialize and truly rise. Suffering from Indian competition, English cloth manufacturers advocated for protection against inexpensive imports from the sub-continent. However, it is misleading to say that this protectionist trade policy was the cause of Britain’s industrialization. Correlation does not imply causation. Kicking Away The Ladder, a book by the Korean Cambridge economist, H.J Chang, provides a good historical analysis of the rich world’s early development (partly) relying on state intervention. However, it is filled with inaccuracies. For example, Chang selected “successful” examples of industrial policy, while excluding many more unsuccessful ones.  Moreover, in their paper titled Is There a case for industrial policy: a critical survey, economists Howard Pack and Kemal Saggi state, “since we do not know how Japan would have fared under laissez-faire, it is difficult to attribute its success to its industrial policy. Maybe it would have done still better in the absence of industrial policy or maybe it would have done much worse.” A review of Chang’s book by Darmouth College economist, Douglas Irwin, concludes that it:

…falls short of persuading. Perhaps the biggest disappointment is Chang’s extremely superficial treatment of the historical experience of the now developed countries. He has simply chosen not to engage the work of economic historians on the questions he is raising. For example, chapter one — “How Did the Rich Countries Really Become Rich?” — does not contend with the work that economics historians have done on the topic. Given the broad question posed in this chapter, one might have expected Chang to confront such landmark works as Douglass North and Robert Thomas’s The Rise of the Western World (1973) or Nathan Rosenberg’s and L.E. Birdzell’s How the West Grew Rich: The Economic Transformation of the Industrial World (1986). These works stress the importance of political systems that provide security to economic transactions and economic systems that allow for competition, broadly construed. But Chang does not explain why the lessons from these works are not relevant to developing countries today.

Industrial Policy in Africa

At the request of local (European) manufacturers, many colonial governments adopted trade barriers (tariffs) and provided financial support to local (infant) industry. For instance, the colonial administration in present-day Kenya introduced tariffs in 1958 to safeguard local industry.  This activist industrial policy carried over when the country gained its independence from Britain in 1963. However, like in Argentina and elsewhere, import substitution industrialization failed in Kenya due to “its capital-intensive nature”. Kenyan economists Jacob Chege, Dianah Ngui, and Peter Kimuyu said this about their country’s failed industrialization strategy during the 1970s:

The import substitution strategy was in general strongly biased against exports. The limited local demand slowed the IS drive while initial efforts to shift to export promotion were constrained by structural rigidities, low productivity and macroeconomic instability. In addition, the protection strategy reduced competition within the domestic industry, making industries act as monopolies, reaping high profits while operating at low capacity utilization and raising prices to consumers.

Industrial policy was also tried in the Gold Coast, present-day Ghana. Harvard’s John A. Robinson highlights the country’s failed experience in his paper “Industrial Policy and Development: A Political Economy Perspective”. He says, ”

One of the most detailed studies of the failure of industry policy in Africa is Killick’s book (1978) seminal book about development in Ghana. This should be required reading for anyone advocating industrial policy as a current solution to Africa’s problems. He discusses in great detail examples of industrial projects from the early 1960s and illustrates in one case after another how inefficient they were. He shows that cost benefit calculations were ignored and inefficient investment projects undertaken

Robinson cites Killick’s example of Ghana’s cattle-based industrial complex. He adds, “the footwear factory … would have linked the Meat factory in the North through transportation of the hides to the South (for a distance of over 500 miles) to a tannery (now abandoned); the leather was to have been backhauled to the Footwear factory in Kumasi, in the centre of the country and about 200 miles north of the tannery. Since the major footwear market is in the Accra metropolitan area, the shoes would then have to be transported an additional 200 miles back to the South.” He concludes that industrial policy “worked” in countries such as Taiwan and Korea, but failed in Argentina, Ghana, and Kenya because of, to use a Bill Clinton’s aphorism, domestic politics. In his 2009 Development Policy Review Debate with H.J Chang titled Should industrial Policy in Developing Countries Conform to Comparative Advantage or Defy It?”, Justin Lin, former World Bank chief economist, says this:

Too often, developing-country policy-makers have tried to take a short cut in this endogenous process of industrial and technological upgrading. They have fixed their sights and their policies on an ideal industrial structure that they associate with modernisation, but that structure is of course usually capital- and skill-intensive and is characteristic of a higher-income country than their own. As I have argued in my Marshall Lectures (Lin, 2009), industrial strategies of the often newly-independent developing countries in the 1950s and 1960s were informed by incorrect perceptions of the binding constraints on development. These countries adopted development strategies that placed a priority on capital-intensive heavy industries, that is, industries that made intensive use of a factor that they largely lacked, and that neglected to use many of the factors that they had in great abundance, such as unskilled labour and natural resources. In effect, these policy-makers took the optimal industrial structure as something that they could impose exogenously, rather than something that results from the characteristics of the economy and changes over time.

Why Africa de-industrialized?

Chelwa blames the World Bank and International Monetary Fund (IMF)’s Structural Adjustment Programs (SAPs) for Africa’s so-called de-industrialization. Yes, SAPs were wrongheaded policy prescriptions, because they assumed that African countries faced similar problems and were more or less on the same (development) level. In addition, these Bretton Woods institutions assumed that African leaders will do the right thing (i.e. not embezzle loans). However, in my opinion, Africa’s de-industriliazation is mostly due to China’s entry into the world market. With its comparative advantage in low-skilled and inexpensive labor, Chinese imports have impacted rich and developing countries alike. The table below from a paper titled “Is China “crowding out” South African exports of manufactures” clearly shows that China’s rise has affected African manufacturing sector, especially South Africa’s. As the continent’s main manufacturing powerhouse, Pretoria dominated Africa’s manufacturing imports. The Rainbow nation has lost its market share in the continent, especially after China joined the World Trade Organization in 2001. Screen Shot 2015-06-22 at 1.49.27 PM

How to boost employment in Africa

Although African countries have (relatively) stabilized economically and politically, there are still a lot of work to be done to sustain inclusive growth. Infrastructure spending (private or public) is still inadequate, education quality is poor, corruption is still rampant, and inefficient public companies still dominate several sectors, especially in energy. Moreover, intra-africa trade is still costly due to trade barriers and factors outlined above, and labor laws are still rigid due to powerful union interests. All of these factors shows why African countries rank low on several international standards of governance, personal and economic freedom, and business environment. Yes, they have improved their de jure business climate, but there are still work to be done to remove de facto impediments such as bribes. Chelwa is right that African countries’ reliance on Chinese demand for commodities is not sustainable. However, industrial policy is the wrong prescription for the continent. It was tried but failed to help the continent move up the ladder. To expect corrupt and myopic (African) politicians to target successful public-private partnerships that will lead to the continent industrialization is too idealistic. State capitalism might have “worked” in few cases, but we should not view it as it model for today’s Africa (or elsewhere). “Governments rarely evaluate the costs and benefits properly,” wrote The Economist. Arguing against economic planning in the United States, former Reagan’s Budget Director and Federal Trade Commission (FTC) chairman, James C. Miller III, put it succinctly, “… they are bad history, bad economics, and bad politics—three strikes that should declare a policy “out” in any league.”

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